If you've been assigned the wrong tax code you could well be paying over the odds. You might even be paying too little tax, which doesn't sound all that bad - until you realise that you will have to pay back whatever you owe during the next tax year.
HM Revenue & Customs has been known to get it wrong before now, so it's a good idea to check regularly and be proactive.
What is your tax code?
If you work and earn more than £10,600 (the personal allowance limit for 2015/16) you'll have to pay income tax on your salary.
You can be taxed even if you don't work; this might be the case if you live off a pension, investments (interest on savings or shares) or income paid from a trust. If your income exceeds the personal allowance you'll have to pay income tax.
If you work, the amount you pay the tax man is calculated using your tax code; it tells your employer how much to take out of your wages and hand over to HMRC.
The code, which you can find on your payslip, P60 and pay-as-you-earn (PAYE) coding notice, consists of numbers and a letter (typically two or three numbers and one letter).
The number indicates how much you can be paid tax-free during each tax year (when it's multiplied by ten).
The letter provides your employer with information about the rate of tax you need to be charged. Find out more by reading Are you paying too much tax?
Why you need to check your tax code is right
If you've been given the wrong tax code you could be paying too much tax. This can happen for a number of reasons, such as if:
You have changed jobs
Your benefits have changed
Your company benefits have altered
You have more than one job or get income from an additional source
For example, HMRC may provide you with the wrong tax code if you switch jobs and don't let them know.
They may assume that you now have income from two salaries and could tax you extra as a result, so you must be on your toes to inform them if your situation changes.
Errors can also occur because many figures on your PAYE notice are estimates and vary depending on your circumstances.
How often do you need to check your tax code?
It's best to check your tax code whenever your situation changes, for instance:
If your pay goes up
You start receiving company benefits like a car or medical insurance
You receive any other income
You start getting a state pension
If you receive a new tax code from HMRC you should also take this as a prompt to double check they've got it correct.
How to check your code is correct
To make sure the information on your coding notice is right you should check that it contains: your name, your address, your National Insurance number and your current employer. If these details are wrong, you need to contact HMRC straight away to let them know.
Your coding notice should be sent to you early in the year so any changes can be made before the new tax year begins. If you have more than one job or pension, you'll get a different code for each.
If you're at all unsure about whether your tax code is right or you're paying the correct amount of tax, it's crucial that you get in touch with HMRC.
You should contact your tax office to fix or highlight any issues as soon as you can - the faster the better.
If you're contributing too little tax the chances are that your code for the tax next year will be adjusted so that you end up paying more to make up for it.
HMRC will offer an estimate of how much you've underpaid, so it's important to make sure you stay vigilant - otherwise you may pay more back than you need to.
If you've paid too much tax then you should be able to get a rebate, or they'll adjust your tax code for the next financial year.